Trade risks are quite evident in markets if you look real hard

Following the disastrous Group of Seven summit this weekend, where President Donald Trump upended a carefully crafted effort at unity among the worlds top economic powers, its safe to say that most investors were probably expecting equities to stumble on Monday. Instead, the MSCI All-Country World Index of global stocks closed at its highest level since March 14.

A sign of complacency? Perhaps, but digging a little deeper beyond the market headlines reveals a good amount of jitters over the potential for a budding trade tiff to devolve in a legitimate trade war. That can be seen in the performance of the Standard & Poors SmallCap 600 Index, whose constituents are mainly domestic companies withhardly any international operations that would be exposed to tariffs and a higher dollar.

The gauge closed at a fresh high on Monday, extending its gain this year to 11.2 per cent. By contrast, the S&P 500 Index, which is chock full of companies with international exposure, is up only 4.05 per cent this year. That marks a reversal from 2017, when the S&P 500 gained 19.4 per cent while the S&P SmallCap rose just 11.7 per cent. Heres another way that investors are putting a greater premium on companies that might be insulated from a trade war: At 20.3 times expected earnings, smallcaps are more expensive than bigger peers in the S&P, which has an average price-to-future-earnings ratio of 17.5 times. The gap of 2.84 times has expanded from 2.16 at the end of March.

THE EURO IS SAFE — FOR NOWThe Great Italian Debt Crisis of 2018 is over. Maybe. If you blinked, you may have missed it. The Bloomberg Euro Index was poised to close on Monday at its highest level in almost three weeks after Finance Minister Giovanni Tria made assurances that the country would stay committed to the shared currency. Tria told the Corriere della Sera newspaper over the weekend that there was “no discussion” to leave the common currency and that the government would also block any market conditions that would “push toward an exit.” The Bloomberg Euro Index fell to its lowest since July at the end of last month on just such a possibility, while Italian stocks and bonds tumbled.

VOLATILITY RULES EM FXOne of the biggest laments of investors has been the lack of volatility in financial markets globally. Maybe they should look at emerging-market currencies, where the JPMorgan Emerging-Market Volatility Index has just jumped to its highest since March 2017. By contrast, the CBOE Options Volatility Index, or VIX, which measures equities, is at about its lowest since January, and the Merrill Lynch MOVE Index covering bonds is well below its highs for the year. It certainly has been interesting times for emerging markets. Last week featured two surprise interestrate hikes, a market meltdown in Brazil, Argentinas $50-billion International Monetary Fund loan rescue, rising fears of a trade war and the realisation that the end is nigh for stimulus in Europe, according to Bloomberg News.

OPEC FISSURESThe coming meeting between OEPC and its allies in Vienna on June 22-23 is shaping up to be a cant-miss event. Crude pushed higher on Monday, reaching $66.35 a barrel, as oil traders shrugged off a report that Russia lifted crude output 140,000 barrels a day above its cap in the first week of June to the highest in 14 months. Although the report suggests a potential schism in Russias alliance with OPEC to curb production, its notable that Saudi Arabia raised production last month to the highest since October, Bloomberg News reported, citing a person familiar with the kingdoms disclosures to the cartel.